http://taxvox.taxpolicycenter.org/2011/08/23/was-buffett-right-do-workers-pay-more-tax-than-their-bosses/
Was Buffett Right? Do Workers Pay More Tax than Their Bosses?
Roberton Williams | Posted on August 23, 2011, 12:47 pm
Overall, Buffett’s story is correct, but he did get a couple of things wrong.
First, the 41 percent top tax rate he ascribed to his fellow workers appears to be a marginal rather than an average rate. That is, it’s the tax on an additional dollar of income rather than total tax measured as a percentage of total income. A single worker’s earnings must approach $500,000 before his combined income and payroll tax hits even 35 percent and the effective tax rate never tops 38 percent. For a married couple, total earnings have to near $1 million to hit those levels. Those are still very high rates, well above Buffett’s 17.4 percent, but they’re not as high as he asserted.
More importantly, because of progressive tax brackets and the many exclusions, exemptions, deductions, and tax credits, typical taxpayers actually pay effective tax rates well below the levels Buffett cites. And high-income taxpayers usually pay a higher effective rate than he does. The average household in the middle 20 percent of the income distribution (income between about $34,000 and $65,000) will pay combined income and payroll taxes equal to 12.0 percent of total income this year, compared with 19.6 percent for those in the top 20 percent (income over about $104,000) and 20.2 percent for those in the top 1 percent (income over roughly $533,000).
Warren Buffett may be right when he says that high-income taxpayers could pay more, especially given the extremely rapid rate of income growth at the top of the distribution. And he’s certainly correct when he says that the low tax rate on investment income cuts his tax bill well below that of many Americans. But he’s off base when he suggests that all high-income taxpayers pay a smaller share of their income in taxes than their middle-income coworkers.
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from Carpe Diem blog:
CARPE DIEM: Tax Tip for Warren Buffett, and Wouldn't His 2010 Taxable Income Be only $100k To Pay 17.4% Rate?:
"Just a thought: If Warren Buffett is really serious about paying higher taxes, couldn't he simply take the standard deduction voluntarily ($11,400 for married taxpayers filing jointly in 2010) instead of itemizing his deductions? That wouldn't require any change in tax policy, so he doesn't have to wait.
After all, it must be all of his itemized deductions (e.g. charitable, etc.) that reduce Buffett's income tax rate to only 17.4% on about $40 million income last year. Except for about the first 1% of his income ($373,650) that would be taxed at lower rates, he should be paying a marginal tax rate of 35% on the other 99%. Using the tax brackets below for 2010, how could Buffett claim that he paid an effective tax rate of only 17.4% unless his taxable income was only about $100,000?"
Married Filing Jointly 2010 Tax Brackets
Taxable Income Marginal Tax Rates
$0-$16,750..............................10%
$16,751-$68,000.........................15%
$68,001-$137,300........................25%
$137,301-$209,250.......................28%
$209,251-$373,650.......................33%
$373,651+...............................35%
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MORE ON BUFFET AND TAXES
Last year, according to his own accounting, Mr. Buffett earned a “taxable income” of almost $40 million. It goes without saying that most of us will never see that kind of money in our lifetimes. Not by a long shot. You’d think, therefore, all would be “good in the hood” for one of America’s richest men.
But Buffett has a big problem: Taxes. He is unhappy with the amount he pays. It’s not enough, he says. Nor is the amount paid by his super wealthy friends. Earlier this week, Buffett’s odd desire to keep less of what he earns led him to pen an op-ed piece in The New York Times in which he decried Washington for “coddling the super- rich.” Perhaps you saw it.
“Some of us are investment managers who earn billions from our daily labors but are allowed to classify our income as ‘carried interest,’” he confessed, “thereby getting a bargain 15 percent tax rate. Others own stock index futures for 10 minutes and have 60 percent of their gain taxed at 15 percent, as if they’d been long- term investors.”
In 2010, Buffett paid almost $7 million in taxes to the federal government, about 17.4 percent of that whopping “taxable income.” Despite his immense earnings, that percentage came in considerably less than the 20 other folks working in his office. “Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent,” he wrote.
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The diagram below shows why Buffett pays a lower "total" tax rate and why this is an apples to oranges comparison.
http://www.moneychimp.com/features/tax_calculator.htm
Tax Calculator
Obviously, this very simple calculator can only give you an unofficial estimate - please don't try to file your taxes by mailing the IRS a screen shot of this thing stapled to a check. (Although it makes you think that Congress could probably simplify the heck out of the tax code if they really felt like it. They probably just don't feel like it, is all.)
(Adjusted gross income determines whether you are eligible to contribute to a Roth IRA. And don't forget to pay Social Security.)
How to Pay Less Taxes
As complicated as the tax code is, it's built around a philosophy that actually makes sense: the government will reward intelligent behavior with a tax break. A few obvious suggestions:
(1) Don't Churn Your Portfolio
You want to pay the long term capital gains rate, and pay that as infrequently as possible. (Many index funds are low-churn and tax efficient.)
(2) Open a Retirement Account
A deductible IRA gives you a negative adjustment, lowering your taxable income. (A Roth version gives you a tax break later.)
(3) Have "Good" Debt
Credit card debt is bad debt, but a long-term mortgage is very good debt - a fixed, low interest rate, plus a tax break that shows up as an itemized deduction.
(3a) Give to Charity
Another deduction, plus you'll make people think you're nice.
Tax Diagram: Which Rates Apply, and Where?
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WARREN BUFFET RIDES TO BAC'S RESCUE: QUID PRO QUO CLARISSE?
The Silence of the Lambs (1991)
Hannibal Lecter: "Plum Island Animal Disease Research Center." Sounds charming.
Clarice Starling: That's only a part of the island. There's a very, very nice beach. Terns nest there. There's beautiful...
Hannibal Lecter: [cuts her off] Terns? Mmh. If I help you, Clarice, it will be "turns" with us too. Quid pro quo. I tell you things, you tell me things. Not about this case, though. About yourself. Quid pro quo. Yes or no?
[pause]
Hannibal Lecter: Yes or no, Clarice? Poor little Catherine is waiting.
Clarice Starling: Go, doctor.
Hannibal Lecter: First principles, Clarice. Simplicity. Read Marcus Aurelius. Of each particular thing ask: what is it in itself? What is its nature? What does he do, this man you seek?
Clarice Starling: He kills women...
Hannibal Lecter: No. That is incidental. What is the first and principal thing he does? What needs does he serve by killing?
Clarice Starling: Anger, um, social acceptance, and, huh, sexual frustrations, sir...
Hannibal Lecter: No! He covets. That is his nature. And how do we begin to covet, Clarice? Do we seek out things to covet? Make an effort to answer now.
Clarice Starling: No. We just...
Hannibal Lecter: No. We begin by coveting what we see every day. Don't you feel eyes moving over your body, Clarice? And don't your eyes seek out the things you want?
"I've taken a look at recommending a BAC short several times over the past year," says our short specialist Dan Amoss, "with the idea that ‘fraudclosuregate' might transform it into a juicy target for class action lawyer piranhas.
"But I kept coming back to the bull thesis... that with good enough lawyers, BAC can string along this legal settlement process and mortgage-related losses forever. With Tim Geithner at Treasury, BAC also essentially has a lobbyist on its behalf.
"The suspension of mark-to-market accounting, an army of lawyers and lobbyists to fight mortgage put backs, and a very friendly Treasury Department will probably keep the stock muddling along for the next few years. I wouldn't buy it or sell it short. The Fed's ‘zero rates through 2013' policy is a guaranteed carry trade gift to BAC shareholders -- or a tax, if you're a depositor -- that will be measured in the billions."
In other words, in a fair and just world, BAC would have gone down in flames long ago. But it's not a fair and just world... and you can't invest on that assumption.
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MORE ON DEBT AND DEFICITS:
Erskine Bowles on the proposed Obama Budget compromise:
"It is $4 trillion, however, over 12 years. It is heavily back-end loaded, so when you compare it to the Ryan plan and to the Commission’s plan, which also has $4 trillion in savings, it is probably more like $2.5 trillion. And in fairness, the way it is setup, according to our analysis, it really doesn’t stabilize the debt, and the debt as a percentage of GDP gets up to around 77 percent and it never gets to primary balance, which is about a deficit-to-GDP ratio of around 3 percent." -- Erskine Bowles re: Obama's $4T Budget "Savings"
On the other hand, he WAS against this type of behavior before he was FOR it. I guess this is just another example of the huge divide between candidate Obama and President Obama.
On the day before Independence Day 2008, Senator Barack Obama pronounced deficit spending "unpatriotic" at a campaign event. He would go on to rack up more debt in three years than his predecessor did in eight. Does he still think deficits are "unpatriotic," or is that the wrong word?
Sustained deficit spending is certainly irresponsible. Trillion-dollar deficits are an accepted fact of life in Washington, even after a big "deficit reduction deal." This means the government is willing to spend more money than it collects, in perpetuity.
Deficit spending is tyrannical. It's the ultimate form of taxation without representation, presenting children not yet born with bills they never had a chance to vote against. It establishes programs that become permanent financial obligations for future Congresses. It's a lie, because it offers the people subsidies and benefits, paid for with money that doesn't exist. When politicians speak of trillion-dollar "stimulus" programs, they're distorting the free market with false information, and wielding economic influence they don't really have.
Our massive national debt, built through decades of deficit spending, makes America weak. Increasing individual and corporate dependency on a rapidly growing government drains the vitality of the free market. Unfriendly creditor nations like China gain unhealthy amounts of economic leverage over us. Credit agencies like Standard & Poor's become major players in public policy debates. In the end, social chaos caused by the collapse of unsustainable entitlements will destroy civic order.
Does all of that add up to make deficit spending "unpatriotic?" Barack Obama claimed to think so, four trillion dollars ago. — John Hayward
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